Global Growth Steady Amid Rising Policy Uncertainty

The latest World Economic Outlook (WEO) update paints a mixed picture for the global economy. With growth projections holding steady at 3.2% for 2024 and a slight uptick to 3.3% in 2025, it might be easy to conclude that the worst is over. However, beneath the surface, several key developments could shape the world’s economic trajectory in the coming years.

One of the most notable trends highlighted by Pierre-Olivier Gourinchas, the IMF’s Chief Economist, is the increasing alignment among major advanced economies. As output gaps narrow, we see a more synchronized growth pattern. In the United States, after a strong 2023, there are clear signs of cooling, particularly in the labor market. On the other hand, the euro area appears to be rebounding from a lackluster performance, poised for modest growth as labor markets stabilize and confidence returns.

Meanwhile, Asia’s emerging markets—led by powerhouses India and China—continue to be the primary engines of global growth. The latest projections show upward revisions for both countries, making them responsible for almost half of global growth. However, the outlook beyond 2025 is less rosy. China’s growth, for example, is expected to moderate to 3.3% by 2029, down from its current higher pace. The deceleration reflects a maturing economy grappling with structural challenges, including aging demographics and slowing productivity growth.

The global inflation picture is also evolving. After peaking last year, inflation is projected to slow to 5.9% in 2024, down from 6.7% in 2023. While this indicates progress, disinflationary trends are not uniform across all regions. In advanced economies such as the United States, progress in reducing inflation has slowed, and risks are skewed to the upside. One critical reason for this is the persistent pressure on services prices and wages.

During the pandemic, goods demand surged as services were restricted, leading to elevated goods prices. While goods prices are stabilizing, services are becoming relatively cheaper, increasing demand and pushing up wages in service sectors. As a result, the expected decline in overall inflation could be derailed if goods prices remain sticky. This phenomenon is a significant risk to the “soft-landing” scenario where inflation cools without triggering a recession.

Beyond inflation and growth, policy uncertainty has emerged as a dominant theme. Public finances, already strained by pandemic-related spending, are deteriorating further in many countries. This is leaving governments with less room to maneuver in the face of future shocks. Gourinchas underscores the need to rebuild fiscal buffers—gradually but credibly—while ensuring that the most vulnerable segments of society are protected.

The situation is particularly worrying for the United States, where despite being at full employment, fiscal policy is pushing the debt-to-GDP ratio higher. The increasing reliance on short-term funding could pose risks to both domestic and global financial stability, should markets demand higher returns on government bonds.

Perhaps the most concerning aspect of the report is the growing dismantling of the multilateral trading system. An increasing number of countries are opting for unilateral tariffs and industrial policies that challenge World Trade Organization (WTO) norms. This trend not only distorts trade and resource allocation but also risks triggering retaliatory measures that could spiral into broader economic conflicts.

The gradual shift towards a fragmented trading system threatens to weaken global growth, diminish living standards, and hinder progress on shared global challenges like climate change. The WEO emphasizes that international trade is not a zero-sum game. Cooperation remains crucial to ensuring global prosperity. The eight decades since the Bretton Woods agreement have shown that constructive multilateralism is the only way to sustain economic stability and growth.

In conclusion, while the 2024 World Economic Outlook offers some optimism, it is tempered by significant downside risks. Policymakers face the delicate task of navigating a slowing disinflationary path, managing fiscal challenges, and defending the principles of multilateral cooperation. Ensuring that the global economy remains on a steady growth trajectory will require coordinated efforts to promote sustainable growth, accelerate innovation, and strengthen policy frameworks.

The focus now must be on building resilience—both economic and institutional—to withstand future shocks. Only through a shared commitment to global cooperation can we hope to address the pressing issues of today while laying a solid foundation for the growth and prosperity of tomorrow.